Risk off sentiment has been growing this week as Covid cases rise with the Delta variant and various countries continue with lockdowns in locations with higher cases. This has seen fixed income assets get bought, commodities sell off and the yen in demand. Lingering concerns over global growth have darkened the mood in Asia this morning while the Chinese tech crackdown continues to hurt stock markets in the region, with US futures in the red.

No surprises in the FOMC minutes

The Fed minutes painted quite a nuanced picture in contrast to the hawkish outlook and dot plot many observers initially took from the meeting. Officials still see a lot of questions on inflation, the labour market and growth, even as taper talk continues. Some members urged caution and wanted to see more data in order to better assess the economy while others hinted that tapering may start earlier than expected given the stronger economic outlook.

The end of the year seems the likely time for tapering of QE and bond buys but the form and speed it takes will be driven by the data. Although the minutes point to tapering starting in December, many expect the pressure to grow through the summer.

USD remains strong, yen too

The market was unmoved by the Fed minutes and bond yields have continued lower, below 1.28%. King dollar is flat on the day so far but has furthered its advance with EUR/USD trading around 1.18. As yields are falling so USD/JPY has pushed lower and is now trading below 110. The yen is the strongest major in July with safe haven currencies in demand.

USD/JPY looks to have broken the upward trendline from the April lows and is heading towards next support at the 50-day SMA around 109.78. Bearish momentum is strong with a Fibonacci retracement level at 109.51 offering the next support level.

ECB changes strategy

ECB policymakers have agreed to raise their inflation goal to 2% and allow room to overshoot if needed. This is a significant change form the previous target of “below, but close to 2%” and could give justification for sustaining ultra-loose monetary policy as the bank strives to reverse years of below-target inflation.

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